Employers Advised to Await Court Decisions on FTC Noncompete Rule

U.S. employers should maintain the status quo until the fate of a motion to halt the Federal Trade Commission’s (FTC’s) rule prohibiting most noncompete agreements is decided.

That’s what one legal expert communicated to SHRM members in a recent webcast.

Michael Wexler, a partner in the Chicago office of Seyfarth, recommended that employers monitor the progress of the legal challenges to the FTC rule—critical decisions are expected next month—while also preparing to comply if the rule ultimately goes into effect Sept. 4. 

On April 23, the FTC announced a final rule rendering most noncompete agreements unenforceable, with certain exceptions. Lawsuits were quickly filed against the rule, arguing that the FTC lacks the authority to prohibit noncompete agreements. SHRM and others filed amicus briefs in support of delaying the rule from going into effect while litigation is ongoing.

“This is a strategic move to ensure that our members, HR professionals, and business executives are afforded clarity as to how to proceed while the lawsuit is resolved,” said Emily M. Dickens, chief of staff, corporate secretary, and head of government affairs for SHRM.

The U.S. District Court for the Northern District of Texas said it would reach a decision on an injunction to halt the rule by July 3. The U.S. District Court for the Eastern District of Pennsylvania will make its decision by July 23.

That means employers will have more certainty later this summer about when the rule may go into effect, depending on the result of the cases.

In the meantime, hold tight, Wexler said. “Do not send [the required] notices right away; monitor the progress of the legal challenges,” he implored.

Legal experts believe that the lawsuits will be appealed regardless of the outcome and the issue will likely eventually end up before the U.S. Supreme Court.

Brief Recap of the Rule

The FTC’s ban covers all noncompetes for U.S. workers with exceptions for certain industries (airlines, financial services, and nonprofits) and for existing agreements with “senior executives,” defined as people earning more than $151,164 annually who are in a “policy-making position.”

The rule requires employers to provide notice to current and former workers that their noncompete clauses are no longer in effect.

Nondisclosure and nonsolicitation agreements can fall under the ban if they essentially function as noncompetition covenants, and once the rule is in effect it will supersede state law but is not meant to displace stricter state laws.

The FTC said noncompete clauses suppress wages and harm competition by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.

Employers that use the policies typically cite the need to protect trade secrets and other sensitive information from rival firms looking to poach talent and say that the ban would diminish investments in training and development.

SHRM does not support the FTC’s blanket ban on the use of noncompete agreements and continues to advocate for changes to the rule that will result in “a policy that provides for balanced, fairly constructed noncompete agreements for the appropriate workers,” Dickens said.

“In SHRM’s comments to the FTC on the rule, we offered less restrictive alternatives, such as establishing a minimum salary threshold for workers eligible for noncompete agreements, limiting the types of employees who can enter into them or even prohibiting their use in certain industries,” she said.

What to Do Next

SHRM has made clear that employers should prepare for the Sept. 4 effective date in case the courts decide against an injunction halting the rule.

Those preparations include:

• Reviewing current agreements and policies.
• Determining whether any of the impacted employees qualify for the “senior executive” exception.
• Compiling a list of impacted current and former employees, with relevant contact information in order to send notices.

“Before the effective date, employers must provide written notice to any worker who is subject to a noncompete agreement covered by the rule that such an agreement cannot legally be enforced and will not be enforced against the worker,” Wexler said. “Model notice language is included in the rule and can be delivered by email or text message, or by delivering a paper notice by hand or mail. Or you can reach out to counsel to draft notices.”

Wexler added that the rule allows an all-staff email using the model language to be sent, even if only some workers at the organization fall under a noncompete agreement.

He also advised employers to revisit their restrictive covenants to ensure compliance, consider whether business interests can be protected with properly tailored nonsolicitation, nondisclosure or retention agreements, and limit trade secret access only to those who need it.